Making Sense of Mixed Economic Data

What are economic data telling us now? Should we be concerned that the ISM Manufacturing Index fell below the 50 line, which demarcates expansion from contraction? Or should we be encouraged that the much larger services sector, measured by the ISM Non-Manufacturing Index, rose and is generally in an expansionary phase? Should we fret that the ADP Employment Report this morning showed only 118,000 new jobs created, below analysts' expectations and hopes?

The data relate to each other, through these and other economic reports. First, Hurricane Sandy was a factor. We do see that the ADP report includes Mark Zandi of Moody's Economy.com as saying, "Superstorm Sandy wreaked havoc on the job market in November, slicing an estimated 86,000 jobs from payrolls. The manufacturing, retailing, leisure and hospitality, and temporary help industries were hit particularly hard by the storm. Abstracting from the storm, the job market turned in a good performance during the month."

But weaker hiring might really not be all related to the storm. We see from data from the Institute for Supply Management this morning that the headline advanced 0.5 points to 54.7 in November, but some of the details were even stronger. Overall activity surged by 5.8 points to 61.2 -- a rather strong read -- and new orders climbed by 3.3 points to 58.1. That's good, and it doesn't seem, from this data at least, that Sandy caused extensive damage to nationwide economic activity (though perhaps the report would have been even stronger without the storm).

However, hiring fell 4.6 points to 50.3. That's barely positive, and that's not good. Businesses have seen their orders and output increase but don't seem to be adding much staff. Why? Well, we also see from today's Productivity and Costs report that companies are able to expand output without expanding staffing levels. In fact, labor productivity -- often derived from large-scale technology introductions that bear little relation to how many widgets a single worker produces -- increased by an annualized 2.9% in the third quarter.

That means that companies don't need to add to staff. Output, according to the Productivity and Costs report (not the same as GDP, by the way), increased by 4.2% in the third quarter, but companies only needed to increase hours worked by 1.3%. So it shouldn't be any surprise that we can have a rather strong services-sector report coupled with merely tepid hiring, according to the ADP report, storm or no storm.

Separately, we also learn from the ISM Non-Manufacturing Report that respondents to the survey, including wholesalers and retailers, see their inventories as "too high." When these companies have enough stock on hand, they naturally order less from manufacturers. Add in worries about the fiscal cliff, cited in the report, and you have even more reason to expect some softness in this particular data series.

And that, in part, is why the ISM Manufacturing Report showed a slight contraction, with the headline falling 2.2 points to 49.7, where readings above 50 indicate expansion. This was the lowest reading in the index since July 2009, a month after we emerged from recession. The report's employment metric in particular fell 3.7 points to 48.4, showing that manufacturers are cutting staff.

Companies' comments in their responses to the twin ISM surveys showed that service-sector companies, while perhaps not enthusiastic, did at least show "cautious optimism," and some reported increased sales and activity. Then, on balance, you have manufacturers, which were a bit more downbeat in their comments and saw a "slowdown in demand." Worries about the fiscal cliff were more apparent in manufacturers' views than in those of non-manufacturers.

In the end, what we see are mixed signs of economic growth. Besides the storm, much of it relates, apparently, to the inventory cycle. After all, we saw in the third-quarter GDP report that inventory accumulation added a whopping 0.77 percentage point to third-quarter GDP. And in today's factory orders report, manufacturers' inventories are at the highest level since at least 1992. More inventories equals less need to produce more. No wonder manufacturing is seeing more signs of softness than service-sector companies are.